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year, a partner's basis is first increased by items of
income, then decreased by distributions, and finally is
decreased by losses for that year.
In addition, if the S corporation has accumulated
earnings and profits, any distribution in excess of the
amount in an "accumulated adjustments account" will be
treated as a dividend (to the extent of the accumulated
earnings and profits). A dividend distribution does
not reduce the adjusted basis of the shareholder's
stock. The "accumulated adjustments account" generally
is the amount of the accumulated undistributed post-
1982 gross income less deductions. [S. Rept. 104-281,
at 53-54 (1996); H. Rept. 104-586, at 89-90 (1996); fn.
refs. omitted.]
Sections 1367 and 1368, including the 1996 amendment to
section 1368, together with their legislative history, support
our holding that adjustments to the AAA for current year losses
are made prior to any adjustments to the AAA for shareholder
distributions made during the year. Accordingly, respondent's
determination that petitioner received a taxable dividend from
MTI in 1990 is sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.
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Last modified: May 25, 2011